How Companies Can Get the Utility Packages They Need
Energy availability is a vital factor in any site selection process. Making an energy decision is more than just cost per kilowatt-hour — a well-designed utility plan should also take into account grid capacity, rate structure, service/distribution, and related utilities, such as wastewater treatment.
Additionally, as companies plan for growth, they need to be aware of what their future utility requirements will be and how these will impact operational costs. This requires working through various scenarios with your advisor to create a comprehensive plan that can then be used in discussions with utilities.
With the pace of doing business these days, some COOs, CEOs, and plant managers simply see these utility costs as a line item and not something they should try to understand, or influence. Utility functions always have a cost to manufacturers — the key, however, is to understand the “how and why” behind the cost, followed by developing an operational strategy that minimizes the cost.
Be Informed of Current Use
Understanding the type of energy user you are is critical for facilitating a strategic dialogue with utilities about bringing your electric load into their service territories. The best cost efficiencies are achieved using a coordinated approach that integrates both energy and related infrastructure needs.
Companies need to understand how important cost of energy is to their long-term economic performance. They also need to know the water disposal costs or volume limits (gallons of flow, chemical oxygen demand, total suspended solids, phosphorus, etc.) that would be imposed for any new sites they are considering. A good way to do this is by overlaying the operating trends of the plant with the energy services costs over time — this helps identify any unusual events or circumstances causing higher cost.
The next step is being sure to understand the structure of the bill (energy cost, delivery fees, demand charges, total usage, and minimum and maximum volume requirements) and time of day/year considerations. If there is any indication that the incremental cost of service has increased, complete a rate review or an energy audit at the plant level to determine if the increase is related to a one-time event, or a recurring situation. If a company is only spending $50,000 a year on its utility costs, a formal review with a third-party energy professional may not be worth the time and expense; however, when a company is spending millions of dollars on utilities, identifying even small discrepancies, and controlling these cost-increase factors, will lead to recurring cash savings for years to come.
A well-designed utility plan takes into account capacity and reliability, and can also deliver a significant, annual cash flow that can be reinvested in the company. If existing facilities have high wastewater or electrical bills, it is essential to understand what is causing those high rates. For electrical, perhaps the facility is creating a surge in peak use every morning when ramping up production, resulting in higher, ongoing demand charges (demand charges alone can make up 20 percent of an electrical bill). A possible solution would be the business inquiring about an interruptible rate class if that doesn’t compromise production, or adopting a routine operational start-up strategy that minimizes instantaneous load. For wastewater, is the company discharging high-strength liquid waste at the same time of day the city treatment plant is reaching its maximum capacity? If so, the company can likely work with the utility to determine a better time during the day for discharge, when there is less flow.
Partnering for Long-Term Success
Companies that are relocating or expanding need to determine which utility functions are critical to their long-term growth, and then formulate a plan that identifies the best utility package options. The next step is opening a dialogue with the utilities to find out if they have assets that are a good fit for the company’s operational needs.
Driven by the demands of their regional economies and the industries they serve, many utilities have developed incentives and special programs that enhance the local business environment. Some utilities — such as Duke Energy, based in North Carolina — have dedicated business recruitment staff for specific industry sectors. They advise site selection consultants and company representatives about power costs, infrastructure capabilities, and available sites and buildings that match the client’s needs.
Contacting utility companies early in the site selection process is highly recommended (both for greenfield sites or expansions of existing operations) — especially for utility-intensive operations. Companies working on their own, however, frequently do not compile or analyze the proper usage data that utilities need to make recommendations. Just ask John Geib, Duke Energy’s director of North Carolina economic development.
“Too often manufacturers only provide minimal electrical information for their energy-intensive projects in the site selection request for proposal (RFP),” he says. “Usually this is not enough to allow the utility to craft an accurate rate estimate, much less assess a given site for its electrical appropriateness in capacity, reliability, and time to delivery. When companies wait too late in the process to investigate these issues, they often create unintended problems when it’s time for the start-up phase of manufacturing.”
Site Selection Scenarios
When it comes to the cost of energy, rates are regulated by the Public Service Commission and each state’s specific rules; however, other costs such as interconnect/service, demand charges, etc. can fluctuate among providers within a region. If a facility is part of an energy distribution network that has high transmission fees due to a high cost of installation or local end-of-line servicing, an alternative provider may be more cost-effective. Customers have more supplier options in deregulated markets. For example, if a company is a large propane user in a rural setting, it may be beneficial to approach natural gas suppliers in that market about running a natural gas pipeline to the area. The supplier, in turn, may pay for some or all of the pipeline installation in return for a long-term purchase agreement (5–10 years) going forward.
A company will locate a new facility in an area that can provide both its electrical and wastewater needs — ideally supplied by a well-developed, existing utility infrastructure. However, if “gaps” exist, utilities may cover some or all of these gaps (for example, site-related interconnection expenses) to ensure the company locates in its territory. And, where utilities have territories with solid electrical generation assets that aren’t attractive to industry because wastewater treatment infrastructure is absent or inadequate, utilities will often help pay for adding that infrastructure.
Utility infrastructure in the U.S. has been built over time to service the needs of municipalities and businesses. As regional and national economics change and industries move in or move out, grid infrastructure, capacity, and delivery capabilities will also change. For example, in the 1990s a sharp increase in new dairy farms occurred in rural areas of the western and southwestern U.S. due to the availability of large tracts of land. As a result, numerous milk and dairy product processors followed. Although some of the core electrical infrastructure may have existed at fair (or lower than average) pricing, virtually no water or gas infrastructure had been installed in many of these rural settings.
Utilities also built tremendous infrastructure and capacity in some regions of the U.S. (Midwest, Southeast) for the manufacturing industries that were thriving there. However, because of shifting economic forces, those industries eventually shut down (“industry contraction”) as the work was outsourced to China and other low-cost countries. North Carolina, for example, was hit especially hard by the loss of most of its textile and furniture industries. Contacting utility companies early in the site selection process is highly recommended - especially for utility-intensive operations. Companies working on their own, however, frequently do not compile or analyze the proper usage data that utilities need to make recommendations.
Consequently, now these areas have a surplus of capacity, infrastructure, and existing, vacant facilities that can be brought online quickly. State governments, local economic developers, power companies, and other utilities are now working together to find creative ways to re-deploy these “ready and waiting” assets. This includes supporting state public/private partnerships via funding for strategic initiatives or technical support of projects.
Baker Tilly has discussed how to use some of these strategies effectively, such as New Markets Tax Credits (NMTCs), with Duke Energy’s economic development team. These credits are often available for these same economically distressed or rural areas, which are good targets for job creation through investments in new facilities or upgrades to existing operations. To see if a site qualifies for NMTCs, visit the New Markets Tax Credit and Low-Income Housing Tax Credit mapping tool.
Saving Energy, Saving Money
In this fast-paced, global economy, companies want to focus their attention on what they do best — making their products. They would prefer not to deal with the finer details of utility costs. This is especially true for market sectors that are experiencing rapid growth and have not slowed down long enough to analyze their utility bills. It is, however, worth the effort.
Developing an integrated, long-term plan with which to approach your utilities can save companies millions of dollars when expanding or building a new facility. This kind of cost reduction is also helpful in securing funding from banks and investors. Not only does a well-designed utility plan reduce infrastructure costs, it delivers a significant, annual cash flow that can be reinvested in the company.
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